Bank of Israel May Start Buying Government Bonds

The Bank of Israel may soon announce a new emergency plan in its efforts to lower long-term interest rates and ease the credit crunch. The central bank is considering purchasing billions of both government and corporate bonds.

Governor Stanley Fischer will decide soon as to how large the purchases will be and how often the acquisitions will be made, after consulting with Supervisor of Banks Rony Hizkiyahu and other senior Bank of Israel officials. The Finance Ministry is also involved in the decision process.

Such a step would mean printing money, and would likely result in higher inflation in the medium-term.

The law forbids the central bank from buying shares, but allows it to purchase assets that can bolster the monetary policy, such as government and corporate bonds. The BoI stopped intervening in the bond markets 13 years ago.

Informed sources estimate that the bank will buy government bonds first in order to push up their price and lower their yields. Low yields on government bonds would then trigger lower interest on other instruments.

"If necessary," central bank Governor Stanley Fisher told a press conference last week, "we will use other means that we are currently considering, such as purchasing financial assets." The BoI has made no announcements concerning the scope of its planned purchases, but will have to invest a few billion shekels in order to have any effect. The bond purchases will be the third measure in the central bank's struggle against the economic slump, and will join the lower interest rates and the daily purchases of $100 million. The foreign currency acquisitions are aimed at strengthening the dollar and thereby assisting exporters.

Last week the BoI lowered interest for the sixth consecutive time, to its lowest level ever - just 1%. The bank wants to reduce financing costs for companies and households, in an attempt to jump-start economic growth and stave off a recession. All these efforts have yet to bear fruit, as the commercial banks are in no hurry to grant loans and have not lowered their interest rates on overdrafts and revolving credit.

Last week the American media mentioned the possibility that the Federal Reserve Bank would buy American bonds, but no such purchases have been made so far.